Understanding the cost of green buildings evidence from singapore

This systematic study addresses questions on the construction cost of investments in environmental friendly design, and tries to identify whether there exists a cost premium between gree

UNDERSTANDING THE COST OF GREEN BUILDINGS:

EVIDENCE FROM SINGAPORE

JIANG YUXI

NATIONAL UNIVERSITY OF SINGAPORE

2010

UNDERSTANDING THE COST OF GREEN

FOR THE DEGREE OF MASTER OF SCIENCE

DEPARTMENT OF REAL ESTATE NATIONAL UNIVERSITY OF SINGAPORE

2010

i

Acknowledgements

This thesis would not have been possible without the help of many people I would like to express my deepest gratitude and appreciation to the following persons who have contributed to this thesis

First and foremost, I would like to express my sincere gratitude to my supervisor, Associate Professor Yu Shi Ming, Head of Department of Real Estate, School of Design and Environment, NUS, for his unceasingly useful advice and comments, and his invaluable guidance and encouragement throughout this work and in the writing process of this thesis

I cannot fully express my appreciation to Lee Min Xian, Research Assistant of Department of Real Estate, for her kind help and beneficial discussions Also

my eternal appreciation goes to Associate Professor Tu Yong, for her kind guidance and suggestions especially in the beginning of this research

I would like to thank developer firms, City Development Limited and Keppel Land, for providing generous access to all the necessary data employed in this research, as well as for the beneficial advices

Many thanks go to staffs in Building and Construction Authority, especially

my friend Wang Yuan, Mr Yock Keng Leow and Ms Jocelyn Chua for sharing their invaluable knowledge and assistance

My grateful appreciation also goes to all friends in SDE, for their suggestions and encouragements Without you my friends, this work could have never been done

ii And finally, my sincere thank go to my Mother and Father, my boyfriend, who have always inspired me to continue my studies, and who have given me so much of their love and support for the many years of education

iii

Table of Contents

List of Tables v

List of Figures vii

List of Tables in Appendices viii

Summary ix

1 Introduction 1

1.1 Background 1

1.2 Research Problem 7

1.3 Research Objectives 9

1.4 Significance of the Study 10

1.5 Organization of the Study 13

2 Literature Review 15

2.1 Introduction 15

2.2 Construction Cost of Green Buildings 15

2.2.1 Definition of Construction Cost and Green Cost 15

2.2.2 An Overview of “Green Cost” Issues 16

2.2.3 Discussion 20

2.3 Cost Considerations of Green Buildings 21

2.3.1 Conventional Building Attributes 22

2.3.2 Green Attributes 24

2.3.3 Other Attributes 28

2.4 Summary 33

3 Green Building: A Solution for Energy Problem 34

3.1 Introduction 34

3.2 Energy Intensity in Singapore and Related Measures to Achieve Energy Efficiency 34

3.3 BCA Green Mark Scheme 37

3.4 Summary 40

4 Research Methodology 42

4.1 Introduction 42

4.2 Measurement of Construction Cost 43

4.2.1 Introduction 43

4.2.2 Cost Estimation- Practical Method 46

4.2.3 Cost Estimation- Theoretical Model 50

4.3 Measurement of Green Cost 53

4.4 Summary 55

5 Sample Selection and Data Description 56

5.1 Introduction 56

5.2 Data Collection 56

5.3 Definition of Variables 61

5.4 Descriptive Statistics 63

5.4.1 Dependent Variables 64

5.4.2 Building Attributes 67

5.4.3 Green Attributes 68

5.5 Summary 72

6 Empirical Findings 73

6.1 Introduction 73

iv

6.2 Determinants of Construction Cost 75

6.3 Determinants of Green Cost 81

6.4 Determinants of Green Cost Percentage 83

6.5 Summary 86

7 Trend, Development and Implications 88

7.1 Introduction 88

7.2 Development of Green Mark Scheme 88

7.2.1 Category Changes 90

7.2.2 Changes of Points Allocation 90

7.2.3 Sub-category Changes 95

7.2.4 Green Mark Score-Rating Changes 97

7.2.5 Discussion 98

7.3 Selection of Green Features 101

7.3.1 Number of Features Considered by Developers 101

7.3.2 Number of Features Incorporated in Projects 104

7.3.3 Green Features with High Adoption Rate 107

7.4 Cost-Benefit Analysis of Green Features 109

7.4.1 Cost Analysis of Green Features 109

7.4.2 Benefits Analysis of Green Features 112

7.4.3 Discussion 115

7.5 Trend of Construction Cost and Green Cost 116

7.6 Summary 120

8 Conclusion 122

8.1 Main Findings 122

8.2 Limitations of the Study 125

8.3 Recommendations for Future Work 126

References 128

Appendices 137

v

List of Tables

Table 2- 1 Extra costs to go green vary by region 19

Table 2- 2 Latest rate of Prescribed Green Premium with effect from 1 September 2009 19

Table 2- 3 Average green cost and payback times for Green Mark developments 20

Table 2- 4 Range of green cost and payback periods by Green Mark rating 20

Table 2- 5 Code Frame Type 23

Table 2- 6 The demand for Basic Construction Materials in 2008 and 2009 30

Table 2- 7 Market price for Basic Construction Materials in 2007 and 2008 30

Table 2- 8 Mean values of Building Tender Price Index by year 32

Table 4- 1 Building cost estimates comparison 49

Table 5- 1 Data description 57

Table 5- 2 Variables and definitions 62

Table 5- 3 Award Year of sample projects 63

Table 5- 4 Descriptive statistics of overall sample 64

Table 5- 5 Statistical results of green cost percentage by Green Mark rating 66 Table 5- 6 Comparison results on average green cost percentages between previous literature and our results 67

Table 5- 7 Comparison results on green cost percentages between BCA report and ours 67

Table 5- 8 Required Score for each Green Mark rating in version 3 70

Table 5- 9 Descriptive Statistics- Green Performance by type 71

Table 6- 1 Estimated relationships between dependent and independent variables 73

Table 6- 2 Summary statistics on selected variables 75

Table 6- 3 OLS regression estimation of Construction cost 79

Table 6- 4 OLS regression estimation of Green cost 82

Table 6- 5 OLS regression estimation of Green Cost percentage 84

Table 7- 1 Different versions of assessment criteria and their effective date 88

Table 7- 2 Award Year and Award criterion 90

Table 7- 3 Point allocations changes from Version 1 to Version 3 92

Table 7- 4 Point allocations in Version 3 93

Table 7- 5 Sub-category Changes from Version 1 to Version 2 96

Table 7- 6 Sub-category Changes from Version 2 to Version 3 for residential buildings 96

Table 7- 7 Sub-category Changes from Version 2 to Version 3 for non-residential buildings 97

Table 7- 8 Point-Scoring Rating Criteria 98

vi

Table 7- 9 Comparison between COMPANY X given list and Checklist 102

Table 7- 10 Project information 104

Table 7- 11 Statistics on green features incorporated 105

Table 7- 12 Statistics on adoption rates of green features 107

Table 7- 13 Summary of Green features with a high adoption rate 108

Table 7- 14 Costs comparison between green features and basic building requirements 110

Table 7- 15 Green Cost distributions by category 112

vii

List of Figures

Figure 1- 1 Worldwide Green building rating systems 4

Figure 1- 2 Statistics on BCA Green Mark awards (from 2005 till 2009) 4

Figure 1- 3 Date and type of the publications (until March 2009) 11

Figure 1- 4 Three main rating systems in literature - BREEAM, LEED, Energy Star 12

Figure 2- 1 Extra costs to become LEED certified as of 2007 excluding Certification fees 19

Figure 2- 2 Trend in incremental cost for meeting LEED Silver in Seattle over 4 years (data not available for 2002) 26

Figure 2- 3 Metal Price Movements 30

Figure 2- 4 Building Tender Price Index (Year 2005=100) 32

Figure 3- 1 Energy consumption in Singapore (2005) 36

Figure 3- 2 Five key criteria in BCA Green Mark and their percentage in total score 38

Figure 3- 3 BCA Green Mark - In Singapore 40

Figure 3- 4 BCA Green Mark- Beyond Singapore 40

Figure 4- 1 Project Life Cycle Estimates 45

Figure 5- 1 Green Mark Structure 60

Figure 5- 2 Construction prices (per square meter) by Green Mark rating 65

Figure 5- 3 Green cost percentage by property type 65

Figure 5- 4 Statistics on Green Buildings awards in 2009 (by category) 69

Figure 5- 5 Number of buildings by Green Mark rating 70

Figure 7- 1 Point allocations by Green Mark version 93

Figure 7- 2 Motivations for energy efficiency investments in 2007 and 2008 99 Figure 7- 3 The impact when we go less green to more 119

viii

List of Tables in Appendices

Appendix Table 1 Summary of Policies and Measures in E2 Singapore 137

Appendix Table 2 Summary of Green building Schemes 138

Appendix Table 3 Green Mark for Existing Buildings (Version 1) 140

Appendix Table 4 Green Mark for New Buildings (Version 1) 141

Appendix Table 5 Green Mark for Air-Conditioned Buildings (Version 2.0) 142 Appendix Table 6 Green Mark for Residential Buildings (Version 2) 143

Appendix Table 7 Green Mark for Non-Residential building (Version 2) 144

Appendix Table 8 Green Mark for Non-Residential Existing Building (Version 2.1) 145

Appendix Table 9 Green Mark for Residential Buildings (Version RB/3.0) 146 Appendix Table 10 Green Mark for Non-Residential Buildings (Version NRB/3.0) 147

Appendix Table 11 Checklist of green features and description 148

Appendix Table 12 Summary of green features by category 151

ix

Summary

Sustainability has become a wide-ranging concept that can be applied to almost every aspect of life A range of new techniques have arisen to help measure and implement sustainability, especially in the field of green buildings which are designed to minimize environmental impact and resource use However, the response of real estate market has been slow and the often quoted reason is a narrow understanding on the benefits of sustainable buildings Another reason is due to the perception that building green implies higher construction cost early in the project The “green cost” issue, which refers to the idea that green building costs significantly more than conventional construction, has recently become one of the most common objections to this type of development

This systematic study addresses questions on the construction cost of investments in environmental friendly design, and tries to identify whether there exists a cost premium between green and non-green buildings This study confirms the existence of green cost premium The average green cost premium for each rating is 2.45% for Platinum, 1.23% for Goldplus

Moreover, this study evaluates the impact of BCA Green Mark scheme and its ratings on the construction cost and green cost of building projects A hedonic regression model is provided that considers three groups of attributes including (1) conventional building features; (2) green features; and (3) market

, 1.21% for Gold Green costs make up 1.6% of total construction costs valued at $2.81

million on average and it increases with the Green Mark rating

x attributes These factors include number of building storeys, number of units, total area, property type, familiarity of green design and technology, Green Mark rating, estimated energy and water savings, version of Green Mark assessment criteria, and Building Tender Price Index It was found that among green attributes, Green Mark rating, especially whether the building is awarded Platinum rating or not, is the most consistently significant variable affecting green cost Green cost percentages increase with Green Mark rating,

but negatively relate to total building area (in terms of GFA) Energy

efficiency is an integral part of Green Mark Scheme and also the main focus of developers, at the same time the energy performance is positively and significantly related to green cost Unfortunately, because of the limited sample, the study did not conclusively evaluate the significance of the variables as expected Besides, the findings reveal a wide potential for buildings to get greener since only a small portion (36%) of green features have been adopted in the building projects

The purpose of this study is to shed more light on estimations of the potential costs and provide valuable insight to end users, professionals, research institutions, industry and government with empirical evidence The results do contribute to the growing knowledge on green building developments and help accelerate the response of the real estate market to the concept of sustainability

Chapter One - Introduction 1

1.1 Background

Sustainability is a broad concept that can be applied to various contexts, from local to a global scale, from human to other living systems It is recognized as seeking balance between environmental, social and economic demands or - the

"three pillars" of sustainability which challenge conventional economic

wisdom Its wider acceptance maybe trace back to the publication of Our

Common Future (Bruntland, 1987) in which the United Nation's World

Commission on Environment and Development proposed that sustainable development is required to meet human needs without increasing environmental problems Since then, sustainability has become a top priority for both government and industry (Sturge, 2007; Tesh, 1993)

In dealing with sustainability, governments in different countries implement a series of legislative measures, such as planning and establishing judicial and social regulations Firms seek to orient themselves as responsible and responsive to environment and society, as well as to consider corporate social responsibility (CSR) in their decision making CSR has become a normative standard in evaluating firms’ choices about inputs (e.g., the source of raw materials), internal processes (e.g., the treatment of employees), and outputs (e.g., community relations) (Waddock & Graves, 1997) Business begins to embrace responsibility for the impact of their activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere

Chapter One - Introduction 2

In the 21st Century, sustainability is reinforced due to the threat posed by global warming The Intergovernmental Panel on Climate Change (IPCC) (Metz et al., 2007) reported that most of the observed temperature increase dating from the middle of the 20th century was caused by increasing concentrations of the human-induced greenhouse gases (GHGs) On February

20, 2007, the Global Roundtable on Climate Change launched "The Path to Climate Sustainability: A Joint Statement by the Global Roundtable on Climate Change", which called on governments to set targets for GHGs and carbon dioxide emissions reduction More recently, the surging public awareness of sustainability has resulted in a more sustainable lifestyle, which refers to the adoption of recycling and renewable energies To support measuring and implementing sustainability, various new techniques have arisen such as Life Cycle Assessment, the Ecological Footprint Analysis, and sustainable building approaches (Blewitt, 2008)

In general, the building sector has a dominating impact on the environment, which contributes up to 50% of CO2 emissions, 40% of energy consumption,

16% of water usage, 40% of solid landfill waste, 50% of raw materials and 71% of electricity demand (Newell, 2008) Therefore, green buildings, which are designed to help reduce environmental impact and resource consumption (Kingsley, 2008), have gained considerable attention since its first appearing

on the theoretical stage It is defined as “the practice of 1) increasing the efficiency with which buildings and their sites use energy, water, and materials, and 2) reducing building impacts on human health and the environment, through better sitting, design, construction, operation, maintenance, and removal” (Cassidy, 2003; Kibert, 2003)—the complete building life cycle, and

Chapter One - Introduction 3 provide occupants with an environment as healthy as possible In other words, green buildings provide considerable benefits such as less disruption of local ecosystems and habitats, resource conservation, decreased air, water and noise pollution, superior indoor air quality, increased employee productivity and reduced absenteeism (Larson et al.) In a study by Fisk (2000), green buildings were found to add $20 to $160 billion in increased worker productivity per year Kats(2003) estimates productivity benefits are ten times the energy savings from green efforts Of course, such claims of higher productivity require further verification to rule out the possibility of just short term phenomenon or the effect of new environments (Miller et al., 2008)

As a result of these benefits, governments in many countries have attached high importance to green buildings, and announced many legislation and subsidies to promote the movement of voluntary environmental certification systems for new buildings and refurbishments (Kingsley, 2008) Up to now, more than 10 countries have adopted different rating systems for green buildings such as U.S., U.K., Canada, Australia, Italy, Japan and Singapore (see Figure 1- 1) Among them, the most widely used rating system is LEED (Leadership in Energy and Environmental Design) Since its inception in 1998, LEED has rated over 14,000 projects in 50 U.S states and 30 countries covering 98.7 km² of development area In Singapore, through active promotion and intense educational efforts, the Green Mark Scheme has certified 215 buildings (250 projects in total) from 2005 to 2009(see Figure 1- 2), including 31 Platinum Awards, 20 Goldplus Awards, 93 Gold Awards and 78

Certified Awards In 2009, there are three newly launched schemes, namely, Green Mark for Infrastructure, Green Mark for Office Interior, and Green

Chapter One - Introduction 4 Mark for Landed Houses

Figure 1- 1 Worldwide Green building rating systems

Source: Philip Yu, Green Building and LEED, Taiwan Energy Service Seminar

Figure 1- 2 Statistics on BCA Green Mark awards (from 2005 till 2009)

Although many buildings have used BCA Green Mark scheme as a design protocol and measuring standard and then obtained certification, the number

of certified buildings began to dramatically increase only since 2008, as shown

in Figure 1- 2 In fact, until 2007, only 45 buildings in Singapore have attained the BCA Green Mark award, which only account for a small percentage of the total number of buildings, and merely constitute an insignificant portion of the

Chapter One - Introduction 5 total built-up area In New York City, of the nearly 5,000 new construction projects issued in 2007, only 4% registered for LEED certification Although this study and figures are based in the U.S., a similar situation is mirrored in Singapore Nevertheless, the response of real estate market is slow The possible reasons are as follows:

The frequently quoted reason for this phenomenon is a narrow understanding

of the benefits of sustainable buildings (Bennett, 2006) Among the benefits mentioned before, the most concerned ones are the perceived higher annual savings, increased rental fee and sales price These benefits have been confirmed by recent studies, although still call for more empirical verification Values of green buildings are expected to increase roughly 7.5%, the ROI (rate

on investment) by 6.6%, occupancy ratios by 3.3% and the rent ratio by 3% (Green Building Smartmarket report, 2006) Furthermore, a group of studies (Fuerst & McAllister, 2009; Eichholtz et al., 2008; Miller et al., 2008 and a forthcoming paper by Wiley et al., 2008) focused on the effect of environmental certification on sale prices and rents respectively, and they all confirmed that there is sales premium and rental premium when comparing green buildings (LEED and energy star) with similar conventional buildings, although with a wide range from 3% to 35% The most widely quoted paper among these was conducted by Miller et al.(2008), which provided a general comparison and tentative analysis of these series of papers while all similar studies are still preliminary and some are still in working paper form

A further reason for this slow reaction is probably due to the lingering perception that building green implies higher construction cost in the early

Chapter One - Introduction 6 phrase (Wiley et al., 2008), thus leaving less financial profits after compensating the extra expense(Sayce et al., 2009) A study carried out by global construction consultants Davis Langdon and the Urban Green Council found out that this sluggish adoption of sustainable building practices in New York City was stemmed from the perception that building green is expensive

It was found “78 percent of architectural, engineering, and construction respondents to Building Design & Construction 2007 survey believed that going green adds significantly to first costs and in CoreNet Global/Jones Lang LaSalle’s January 2008 survey, 30 percent of respondents believed that new green buildings cost 5 to 10 percent more than conventional buildings, and 22 percent believed that green costs more than 10 percent over the cost of conventional buildings” (Lockwood, 2008, Pg5) In fact, these costs have been overestimated as a result of the general deficiency of published data Green costs are overestimated by 300% according to a recent survey by the World Business Council for Sustainable Development (2007)

Builders, developers and other industrial sectors have already acknowledged the perceived higher annual savings, increased rental fee and sales price However, when confronting the slightly higher construction cost, they are still hard to be convinced that green buildings worth the investment It seems sometimes that their doubts are reasonable Firstly, the potential annual savings are quite uncertain as they depend a lot on the vacancy rate, daily usage and the facilities performance in the long run Some researchers have found that the quantities could differ by over than 100% Therefore, such perceived annual savings are perceived with high risk Secondly, the annual savings are enjoyed by the occupants and tenants, while builders and

Chapter One - Introduction 7 developers are generally concerned with the capital cost of constructing green building, and would have little interest in operational cost savings (Intrachooto

& Horayangkura, 2007; Larson & Lotspeich) These “split incentives” (Fuerst

& McAllister, 2008) hamper the probability of building green But if the building they are constructing is for their own use, builders and developers will consider the operational cost (Intrachooto & Horayangkura, 2007; Larson

& Lotspeich) Even if they concern the operational cost, they will still be worried about whether the increased cost can be compensated by such operation savings, especially how long it will take This suggests a need to discuss or study more on payback time as it remains a concern of those builders and developers

1.2 Research Problem

Given energy consumption can cause many environmental problems, and buildings consume most of the energy, there has been a growing interest in green buildings, which are designed to limit resource use as well as environmental impact on the entire life of a building, from resource extraction

to disposal, and provide occupants with an environment as healthy as possible Many countries such as U.S., U.K., Canada, has adopted green building as a design protocol and measuring standard for a building’s environment performance In academia, large numbers of outstanding papers with regard to green buildings have emerged from different areas like architecture and building, especially since 2006 These papers are concentrated in describing the advantages of green buildings through the comparison with conventional buildings, such as lower depreciation, lower risk, the possible change to

Chapter One - Introduction 8 capital value and rental price, duration to sell or lease, refurbishment costs and other topics However, the disadvantages of green buildings are also frequently mentioned by different sectors in industry, especially builders and developers The “green cost” issue, which refers to the idea that green buildings cost significantly more than conventional ones, has recently become one of the most common objections to the green building development

The literature review (see Chapter 2) found that:

(1) Previous papers have yet to provide a clear opinion about whether sustainability adds to the construction cost of building projects, and if so,

by how much

(2) Even if the cost premium of green buildings projects has been proven by a few studies carried out in foreign context, more studies still need to be developed in the local market since the cost premium tends to vary in different local markets However, there is a lack of sufficient published data on the building projects in Singapore

(3) Among the different approaches for estimating the construction cost, the method that applying descriptive design features instead of quantities, such as size, shape, frame, and location, has been studied in academia for many years, but never been widely applied in construction industry The method requires little data, and is convenient to use and straightforward to show the individual variable’s effect on cost

(4) Previous studies compare the construction cost per square meter between green and non-green buildings However, they fail to consider the impact

of other possible factors on construction cost as well, such as the market

Chapter One - Introduction 9 condition, despite attempts to exclude the impact of different building

features by selecting similar samples to compare with

Based on these, the research problems are:

(1) There is a need to identify the green cost of building projects in Singapore, and evaluate the impact of BCA Green Mark ratings on construction cost and green cost, and by how much

(2) There is a need to develop a method that considers both descriptive design features and other possible factors in the model, to apply in both theoretical and empirical analysis

Therefore, the research problems can be summarized in the following statement:

Is there a cost premium between green and non-green buildings? If yes, how can BCA Green Mark scheme and its ratings affect the construction cost and green cost of building projects in Singapore, and by how much? In what way this impact can be represented in a model for use in theoretical and empirical analysis?

1.3 Research Objectives

The development of green buildings has become a favorite topic in recent years When designing such buildings, the developers require possessing a comprehensive understanding of assessment criteria and scoring system To make a more accurate estimation on the potential costs and adjust their design

at the early stage, it would thus be of interest to know the factors affecting the

Chapter One - Introduction 10 construction cost of green building Therefore, this study addresses questions

on the development of green building, examine the green cost and its possible determinants, and essentially focus on the extent of the impact of BCA Green Mark ratings and green performance on construction costs The objectives of this study are as follows:

(1)To study the Green Mark scheme and Green Mark rating

(2)To identify whether there exists a construction cost premium between green and non-green buildings;

(3)To analyze the impact of Green Mark ratings and green performance

on construction costs;

(4)To adjust the conventional cost estimation method to estimate the construction cost of green building

1.4 Significance of the Study

Due to the growing awareness of sustainability issues, a large number of papers regarding sustainability have emerged in these years, especially after 2006(see Figure 1- 3), which is slower than the demand of developing green buildings

Chapter One - Introduction 11

Figure 1- 3 Date and type of the publications (until March 2009)

Source: Sayce et al., 2009, Pg 8

Up to 2009, most publications with respect to green buildings appear in U.S., U.K and Australia Of the articles studied by Sayce et al.(2009), only some (18%) did not derive from these countries Moreover, the rating system discussed in the literature concentrated on LEED, Energy Star and BREEAM

(Building Research Establishment Environmental Assessment Method) (Figure

1- 4), while for others, “the evidence is not yet there” (Sayce et al., 2009) Therefore, it is not clear whether these research findings can be extended to other countries, or other rating systems, thus suggesting a need to investigate other rating system like BCA Green Mark scheme as it exists in Singapore

Few papers are written on BCA Green Mark Scheme since it was only introduced in 2005 The only evidence available is some general percentage findings from Building Construction Authority (BCA) to indicate that building green is less expensive than many developers think, although it may still cost more than the conventional buildings (based on several buildings’ experience) However, they did not provide the detailed information about the buildings sampled or the methodology used to validate their findings

00 01 02 03 04 05 06 07 08 09

Chapter One - Introduction 12

Figure 1- 4 Three main rating systems in literature - BREEAM, LEED, Energy Star

Source: Sayce et al., 2009, Pg 16

Although many studies on construction costs of green buildings have been carried out, the “green cost” issue is unclear or indefinite The reasons partly lie in that most of these studies are case studies The conclusions are derived from statistical results with comparing the construction cost per square meter between green buildings and non-green ones, and thus have much local variation that adds to or reduces the marginal costs of going green They fail to consider the impact of other possible factors on construction cost as well, such

as the market condition, despite attempts to exclude the impact of different building features by selecting similar samples to compare with This study, therefore, goes well beyond case studies and uses a hedonic model to empirically prove the factors affecting the construction cost and the extent of their impacts

This study aims to provide useful insight to academia, government, and private sector with empirical evidence, help developers and other participants

in the property market make more accurate estimations of the potential costs

It is hoped to contribute significantly to the growing knowledge on green

Chapter One - Introduction 13 building development and help accelerate the response of real estate market to the concept of sustainability

1.5 Organization of the Study

For the purpose and focus of this study, the research is limited to the building and construction industry in Singapore This study is organized as follows

 Chapter 1 contains a brief overview of the research background and research problem, research objectives It also introduces the significance of this study

 Chapter 2 presents the literature review conducted on past research works with regard to green cost issues, summarizes the possible determinants of construction cost and green cost

 Chapter 3 provides complimentary information on the implementation necessary of green building in Singapore

 Chapter 4 describes various measurements of construction cost and green cost in practice and theory

 Chapter 5 provides details on the procedure of data collection, definitions

of the study variables, sources of the data, and the descriptive statistics for empirical samples

 Chapter 6 presents empirical findings of the study The determinants of construction cost, green cost and green cost percentage are tested separately by conducting several linear regressions

 Chapter 7 further discusses the development of green buildings and BCA Green Mark Scheme in recent years, and the trend of construction cost and

Chapter One - Introduction 14 green cost in the near future

 Chapter 8 concludes the study by summarizing some of the key findings, limitations of the study and future extensions to the current research are also discussed

Chapter Two – Literature Review 15

2 Literature Review

2.1 Introduction

This part lists previous evidences and conclusions from cost studies with regard to green building Moreover, it analyzes and concludes the potentially significant factors that determine how much a green building project will cost Some of them can influence green cost as well

2.2 Construction Cost of Green Buildings

2.2.1 Definition of Construction Cost and Green Cost

The total cost of a project includes three parts: site acquisition cost, direct construction costs and indirect construction costs (such as consulting fee and certification fee) (Gottfried, 2003)

The term “construction cost” normally refers to direct construction cost, and it excludes the land cost, legal and professional fees, development charges, authority fees, finance costs, loose furniture, fittings and works of art, tenancy work, site infrastructure work, diversion of existing services, resident site staff cost, models and prototypes, future cost escalation, goods and services tax(RLB report)

In the context of this study, “green building” refers to the building which employs the usage of green technologies and features and got certified by relevant departments Comparably, “non-green building” refers to the conventional and uncertified building “Green cost” refers to the cost of green, which indicates the cost premium for constructing a green building over than

Chapter Two – Literature Review 16 constructing a non-green building

2.2.2 An Overview of “Green Cost” Issues

The “green cost” issue, which refers to the idea that green buildings cost significantly more than conventional constructions, has recently become one

of the most common objections raised to the development of green building (Lockwood, 2008)

The general view of this issue is that the perceived costs of green buildings are higher than conventional buildings’, but lower than is often thought The costs

of green buildings were found to be overestimated by 300 %(Johnson, 2007)

In the local scene, a thesis recently done by one of my alumni found out that over 50% of the 36 respondents believed that constructing a green building costs 10% more than constructing a conventional building

Among the research with regard to green cost, one of the earliest empirical and most cited studies was done by Kats(Kats et al., 2003), who filled the gap with the most comprehensive compilation of valuations of green building benefits and costs With a sample of 33 LEED projects (25 office buildings and 8 school buildings), they found for different LEED ratings, average cost premium of 0.66% for LEED certified, 2.11% for silver, 1.82% for gold, and 6.50% for platinum buildings Turner Construction (2005) found a similar results with Kats et al.(2003) They found the number was 0.8%, 3.5%, 4.5%, and 11.5% in sequence With reviewing a series of green affordable projects, Bradshaw et al (2005), however, disagreed with previous studies Their results showed that the Total Development Cost (TDC) Premiums for Greening

Chapter Two – Literature Review 17 ranged from -18.33% to 7.25% and the Design and Construction Cost Increases for Greening ranged from -25% to 38.94%

A recent and authoritative study, came from Davis Langdon (a global construction consultancy), analyzed 83 building projects with a primary goal

of LEED certification, and make comparisons with 138 similar building projects without the goal of sustainable design (Matthiesen & Morris, 2006) Surprisingly, they concluded that “many projects are achieving LEED within their budgets and in the same cost range as non-LEED projects” and that

“there is no significant difference in average costs for green buildings as compared with non-green buildings” However, this is consistent with the findings of their earlier studies (Matthiesen & Morris, 2004) A survey done by the World Business Council for Sustainable Development found that green costs, in general, is only 5% higher than the cost of conventional construction (2007) A report done by Davis Langdon (2007) studied the cost of achieving specific levels of green (using the Australian Green Star system) by comparing the budgets of green buildings with similar non-green buildings The report concluded that there is a 3% to 5% premium for a 5-Star building, with an additional 5% for a 6-Star building Another cost study assessed the cost of office buildings that are designed to meet a BREEAM Excellent rating and concluded that a 6% premium is due to sustainable design features for the building With data supplied by USGBC, Miller et al.(2008) proved that there were extra costs to go green (see Figure 2- 1) with wide variation by location (Table 2- 1), but still increased with the LEED rating Yudelson (2008) estimated the overall cost premium including both design and construction

Chapter Two – Literature Review 18 ranges 0% to 2% for LEED certified, 1% to 4% for Silver, 2% to 5% for Gold, 2% to 10% for Platinum

In the light of Singapore market, the green premiums range from 0.4% to 8%, and are assumed to be paid back within 8 years These numbers vary with Green Mark Rating, property type and the year of statistics Table 2- 2 shows the latest prescribed green premium in terms of Singapore dollar per square meter (same thereafter) These numbers are derived from the comparison between each green building with a similar non-green building, and are used for developers to estimate their GM GFA so as to attain additional subsidies from BCA Since some non-green buildings have green features as well and are also somehow energy efficient, the research need to identify their green features and designs and then set up a benchmark for comparison with green buildings The mean value and range of green cost and estimated payback (years) for each Green Mark rating are stated separately in Table 2-3 and Table

2- 4 Payback describes the number of years for the profits or savings earned

by a project to pay back the original outlay, which can be calculated with the following equation, according to Pereira (2004):

(2.1)

Chapter Two – Literature Review 19

Figure 2- 1 Extra costs to become LEED certified as of 2007 excluding Certification

fees

Source: Miller et al., 2008, Pg 391

Table 2- 1 Extra costs to go green vary by region

Source: Miller et al., 2008

Source: BCA report, 2008

Classification Prescribed Green Premium

Chapter Two – Literature Review 20

Table 2- 3 Average green cost and payback times for Green Mark developments

Source: BCA report, 2008

Note：Sample size is 27.

Table 2- 4 Range of green cost and payback periods by Green Mark rating

Source: BCA report, 2008

BCA Green Mark rating Green Cost (%) Payback Period (years)

2.2.3 Discussion

The general view on “green cost” issue is that the costs of green buildings are perceived to be a little higher than conventional buildings’, but lower than is often thought There are various studies regarding green cost issue after Kats

et al.(2003) Despite the growing body of research and increasing availability

of data, the green cost is hard to pin down and is presented as a wide range in previous studies Some research suggested this green cost is as a result of introducing more expensive (and sustainably-sourced) materials, more efficient mechanical systems and other high performance features, and better design, modeling and integration (Circo, 2007; Kats et al., 2003) Other research thought that this cost increment could be caused by longer time spent

on the integrated design and commissioning processes since there are usually

Chapter Two – Literature Review 21 many adapting orders during the construction than normal projects Moreover, some wider but relevant points need to be addressed

Firstly, most studies with regard to green cost are U.S based; hence, it is not clear whether these research findings can be extended to other markets and other scheme except for LEED, thus suggesting a need to investigate Green Mark Scheme as it exists in Singapore and several places beyond Singapore

Secondly, the studies did not distinguish between the various levels of rating but only between rated and non-rated buildings The results from such research are rather general and unclear The cost premiums vary extensively, thus resulting in being rather inconclusive

Thirdly, the strongest evidence has emerged from statistical results which compare the construction costs per square meter between green and non-green buildings However, they fail to rule out the possible factors affecting the construction cost, such as the market condition, experience in the local market and the project or portfolio scale, despite attempts to exclude the impact of different building features by selecting similar samples to compare with Other possible impacting factors are further discussed in the next section

Last but not least, the studies did not differentiate the existing buildings from the new buildings, since the construction cost of existing building only refers

to the refurbishment fee

2.3 Cost Considerations of Green Buildings

Cost of construction on a “per square meter (or per square foot)” basis for

Chapter Two – Literature Review 22 houses vary dramatically It largely depends on several attributes like site conditions, local regulations, project scale, and the availability of skilled trader

De Souza et al.(2007) suggested that many other factors could affect construction cost and calculations of green cost, such as the time limit of a project, financing options and capital structure, increasing fee with regard to risk and uncertainty and materials selection

In the following part, an attempt is made to identify the factors influencing construction cost and green cost, in the following order: (1) conventional building attributes; (2) green attributes; (3) other attributes

2.3.1 Conventional Building Attributes

In conventional building cost estimation method, the frequently used factors include number of storeys, number of units, frame type, total area (GFA), built year, and building quality In addition, their transformations are also been used

in the equation, such as construction cost per square foot of building and area per storey In this section, some of the important factors are discussed in depth

Frame type

The frame types widely used in building are load bearing, steel, wood, or concrete (see code A, B, C, D in Table 2- 5) Others include pre-fabricated or pre-engineered, steel and concrete, load or wall bearing and steel, load or wall bearing and wood and load or wall bearing and concrete(see codes E–K in Table 2- 5)

Chapter Two – Literature Review 23

Table 2- 5 Code Frame Type

Source: Wheaton & Simonton, 2007

0 Alterations, non-building, etc without framing

A Load or Wall Bearing (no further description)

E Pre-Fabricated or Pre-Engineered

F Other Described Framing Types

G Unknown Framing Type (no description)

H Steel and Concrete

I Load or Wall Bearing and Steel

J Load or Wall Bearing and Wood

K Load or Wall Bearing and Concrete

Number of storeys

Chau(2007) stated that construction cost should increase with height, since constructing more storeys need more materials and labor Therefore, a positive relationship is expected between number of storeys and total construction cost There has been an old controversy on how building height affects construction cost Literature have historically found the relationship between unit construction cost and the number of storeys was linear (Tregenza, 1972), J-shaped with a turning point at 6 storeys(Flanagan & Norman, 1978), reciprocal (Chau, 1999), and U shaped with a turning point at around 35 storeys(Picken & Ilozor, 2003) The non-linear relationship could due to “the cost of some fixed components of a building (e.g., roofs, foundation) fall initially as the number of storeys increased” (Chau et al., 2007) Moreover, Schriver and Bowlby (1985) found unit construction costs increased with the number of storeys, but decreased with total floor area

Chapter Two – Literature Review 24

Property type

Matthiesen and Morris (2004) found construction cost is affected by property type and varies a lot within the same rating, but there is no significant statistic difference between green and non-green buildings

Project size

Yudelson (2008) suggested that project size has a negative relationship with cost premium A smaller project may have a higher cost premium because certain of the costs of LEED have fixed-cost elements independent of project size that will add to the cost per square foot

2.3.2 Green Attributes

As discussed in last section, conventional features largely decide the overall amount of a building project At the same time, the costs are also increased by incorporating sustainable design - the “green features”, which is discussed later in this section This group of factors has a wide range, including the familiarity of the project team with sustainable design, certification level required, building performance and the changes of assessment criteria “In most cases, these factors have a relatively small but still noticeable impact on the overall cost of sustainability Cumulatively, however, they can make quite

a difference.”(Morris, 2007, Pg 55)

The familiarity of green design and technology

Construction cost may be perceived higher if the contractors are unfamiliar

Chapter Two – Literature Review 25 with sustainable design and thus overestimating the risk they may face or if the contractor may be less willing to bid on “difficult” projects since they have

so much other work to do (Matthiesen & Morris, 2004) Similarly, Kats et al.(2003) also thought the relative newness of green technology may add uncertainty when estimating the construction cost

The familiarity of green design and technology can be represented by the year

of “green” experience of the developer or the number or project they have completed, and assumed to have a negative relationship with construction cost Kats et al.(2003) found many states in U.S had experienced a trend of declining costs associated with increased experience in green building construction This finding was confirmed by Geof et al (2003) Based on 50 green building projects’ experience of KEMA Xenergy(a company)’s, Geof et

al (2003) concluded that the cost of a company’s first LEED project was far more than their subsequent projects and the incremental cost of LEED decreased over time Figure 2- 2 shows the trend in incremental cost for meeting LEED Silver in Seattle over 4 years As can be seen, the cost premiums for many LEED Silver buildings have declined from 2000 to 2003,

no matter what the sizes of the projects are The reason of this decline has been explained as: the company may spend money on “developing a waste management plan, finding a list of acceptable low-VOC finishes, or establishing appropriate contract documents” (Geof et al., 2003); therefore, the start-up of a company’s green building program and training cost a large fraction of the whole expenditure

Chapter Two – Literature Review 26

Figure 2- 2 Trend in incremental cost for meeting LEED Silver in Seattle over 4

years (data not available for 2002)

Note: Large projects (over $10 million); Small projects (under $10 million)

Source: Geof et al., 2003

Certification level required

Level of the certification sought is clearly an issue As approaching to higher levels of certification, even with an integrated design process, the overall cost are likely increased by adding better elements such as green roofs, photovoltaics, and certified wood products A large number of studies need to

be done before the design phase, for example, natural ventilation analyses, computational fluid dynamic studies, more frequent energy modeling and others In some cases, building in Platinum rating can possibly be accomplished for zero or low cost premium Based on available data, Kats et al.(2003) found the rising cost levels associated with more rigorous levels of LEED And they also perceived LEED Gold may be the most cost effective design objective for green buildings Accordingly, this study examines the construction cost as well as its relationship with Green Mark rating, and at the same time evaluates whether there is an optimal strategy of rating selection

Chapter Two – Literature Review 27

Estimated energy savings and water savings

Estimated energy savings and water savings reflect the general efficiency of the green design, and they have been listed as two of the key green features for green buildings in BCA Green Mark annual report Circo (2007) found construction costs increase by 3-5% because of the adoption of energy efficiency facilities The second Info Data report in a series of Davis Langdon’s insights into Sustainability (Davis Langdon, 2007) found that energy improvement and water efficiency are the most important attributes that drive the green strategies and promote the development of energy centric approaches and water centric approaches Moreover, due to the pressure of reduction on carbon dioxide emission, many regions in different countries implemented a carbon tax, such as Australia, Canada, New Zealand, California and Colorado in the U.S., and some countries in European Union According

to BCA, Energy saving is calculated as:

Energy saving (%) Reference model’s annual energy consumption Design model’s annual energy consumption (2.1)

Where the Reference Model must be the same as the Proposed Model in shape, size and orientation

The updating BCA Green Mark Scheme

BCA Green Mark Scheme has kept updating its assessment criteria since its inception in 2005 Up to now, there are several versions of assessment criteria that have been employed in green building assessment Based on the analysis

Chapter Two – Literature Review 28

in Chapter 7, the updating of BCA Green Mark Scheme caused the differences

in building performance and therefore affects the construction cost To represent the differences among several versions of assessment criteria, a

dummy variable “Greenmarkversion” is included in our regression model,

which equals to 1 means the version of Green Mark assessment criteria is not the newest one Detailed discussions are presented in Chapter 7

Different selections of green features

Different selections of green features could affect both the construction cost and green cost A detailed analysis on this factor is presented as a part of results in Chapter 7

2.3.3 Other Attributes

Since Singapore is a city-state, it is unnecessary, like the other countries do, to consider many aspects of differences within the country like local standards or climate The attributes considered in our analysis are as follows

Demographic Location

In U.S and other countries, there is a difference in cost and feasibility between rural and urban area Due to Singapore’s small size, only difference exists between within CBD and out of CBD Since construction cost excludes land cost, it is unnecessary to consider location in our study However, construction cost still differs by site condition and project location (Morris, 2007) For instance, the west facing façade will gain more heat, while north or south facing windows can help ventilation If the building is quite close to the main